Although a new study forecasts steady growth in demand in the long term, the poor global economic environment has caused operating rates to remain low in some regions

The olefins market has started brightly in 2013 but, as in 2011 and 2012, can it last?

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Global olefins markets faded in 2012 after a bright start, as was the case during the previous year, says Kieran Cosgrove of ICIS Consulting. "In both 2011 and 2012, the year started well but ran out of steam through mid-year, which affected the consuming regions of Europe, North America and Asia," says Cosgrove, the author of the World Petrochemical Industry (Olefins) Study, 2012.

"Polyethylene (PE) was the most important downstream sector, along with vinyls and to some extent polyester. Initial indications suggest the second half of 2012 appears to have been better in the US and Asia but China remained a drag."

It seems that history could be in danger of repeating itself, as markets have again rallied strongly in early 2013. But Cosgrove argues that, barring a sharp macroeconomic downturn, global olefins markets would still grow at 4% or more in the next three to four years. This would equate to the need for 10m tonnes of new capacity each year. Longer term, he is forecasting growth of 3.5% per year, which would result in the need for an extra 10-11m tonnes of capacity each year.

MIDDLE EAST SUPPLY ABSORBEDWhile weak demand, resulting from financial and political uncertainty, hurt demand during 2011-2012, Cosgrove adds that delayed start-ups were a bonus.

"The most notable recent example of this was the delay to the commissioning of the ExxonMobil cracker complex in Singapore from 2011 to 2013," he says. "Average monthly or quarterly global operating rates have fluctuated between 85% and 88% since mid-2009. As with demand, operations in 2011 and 2012 started well, but their average rates dropped to 85% for most of the year."

He says North America and South Korea ran close to flat-out, but European rates were low, typically below 80%. Average rates in China had dropped below 90% during 2012, from typically having been close to capacity.

"As for the Middle East, average rates were low in late 2010 and early 2011, but have steadily risen since then," says Cosgrove. "During 2012 they fluctuated around 90%. The main surge in new capacity in the Middle East has now been accommodated, with the next upswing in 2014, which will occur in Abu Dhabi and Iran."

According to Cosgrove, a lot of focus is on North America as the new olefins frontier, through the spate of large investments, none of which will be on stream before 2016.

"But it is easy to overlook the fact that almost 2.5m tonnes of ethylene capacity will be added, through expansions and restarts, in 2011-2015," he says.

PROPYLENE AND BUTADIENECosgrove says other major challenges for the olefins industry are the consequences of both the switch to lighter feedstock in the US and reduced operating rates at European crackers. Propylene and butadiene (BD) supply has, as a result, tightened.

Polypropylene (PP) demand growth has been strong in recent times because product innovation has led to it replacing PE and polystyrene (PS), as well as other polymers, in some end-use applications.

Meanwhile, demand for BD into synthetic resins has also grown very strongly on rapidly increasing auto sales in emerging markets such as China. This has resulted in a shift in propylene/BD vs ethylene price relationships, Cosgrove adds.

"Propylene/butadiene price relationships to ethylene surged upwards in 2009 and 2010, and eased in 2011. Further reductions were evident in 2012, but the general scenario persists - the price ratios in the future are likely to be higher than in the past."

A further factor behind tight C3s was reduced availability from refineries in Europe and the US, Cosgrove says.

"This is the result of refinery closures and changes in operating conditions. Propylene supply in North America will not ease until the first of the new propane dehydrogenation units come on stream in 2015. Supply in Asia is less constrained given the alternative supplies, especially from refineries."

In the case of BD, major investments in new capacities are taking place in Belgium, France, Germany and Turkey, he adds. He warns that this will merely shift the focus of the problem from a lack of BD to a tight control of feedstock crude C4s.

TRADE FLOWSAnother key issue for the industry, as all these dynamics play out, is how trade flows will adjust to accommodate new ethylene capacity in the US, based on cheap ethane via abundant shale gas and the availability of propylene.

"Some changes can be expected," says Cosgrove. "Ethylene shipments from the US to Europe will increase as a result of the new INEOS import terminal in Europe.

He says propylene shipments from Latin America to North America increased in 2011. The major issue will be how regional trade balances develop through the next 2-3 years, as North America and Europe face propylene supply constraints. This could have an impact on derivative markets, he adds.

"By 2015-2016, the sensitivity on propylene derivative exports from Asia and the Middle East could be higher than our current forecast."

But the biggest question is, of course, growth - and whether this year's bright start amounts to anything more than a firm rebound in sentiment.

"As a result, questions have to be asked over planned investments in refineries, coal-to-olefins units or new petrochemical complexes in Brazil, India, Indonesia, Malaysia and Russia."

ICIS CONSULTING

WORLD PETROCHEMICAL INDUSTRY STUDYInformation and data used for this article were taken from ICIS' annual World Petrochemical Industry Study (Olefins). This publication gives a comprehensive analysis of the global supply and demand situation for ethylene, propylene and BD (C4s) and their respective derivatives. It provides insight into how the cyclical petrochemical industry will look in the future, using reconciled data and detailed analysis. Forecasts, trade flows, supply, demand and capacities are all covered. The annual study provides historical data from 2000 and forecasts up to 2025. To enquire about the World Petrochemical Industry Study (Olefins), simply complete the short online form.